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Friday, June 12, 2009

Yes, yes, says that World Bank as the fear of inflation is now replaced (Nepal has over 12% inflation rate right now???) by declining growth and the impact of global slump on poverty.

South Asian countries do not have automatic stabilizers or social safety nets to counter the negative effects of economic slump. So, the only option left is Keynesian fiscal policies (as expected). However, the WB argues that the extent to which this can be used is constrained by the bloc’s high public debt. This should be least of the worries because right now all that matters for countries like Nepal (which has over 12% inflation rate) is how to balance a rise in general price level and ensure economic growth. As is popular right now, the WB recommends investment in public infrastructure such as roads, schools, and hospitals.

South Asian countries may have missed the opportunity to strengthen their fiscal position during good times, which would have enhanced their capacity to counter downturns. Timing is of the essence. Any counter-cyclical policy needs to be tailored to conditions in individual countries. The capacity of a country to undertake counter-cyclical fiscal policy depends on its ability to finance the resulting fiscal deficit, which is easier when public debt is low and external balances are in good shape.

It is essential to protect core public spending in social and physical infrastructure in the face of declining revenues. Spending targeted at vulnerable groups may need to increase. This would require reallocation of expenditures from other areas, as well as greater reliance on borrowing or grants. However, it will always be a risky proposition especially for countries with a weak track record of controlling spending and where there are fears of inflation. Once introduced such spending may be hard to reverse.

According to a number of Economists, a fiscal stimulus program for countering an economic downturn needs to fulfill the 3-Ts; it needs to be timely, targeted, and temporary in order to be effective.

About

Formerly, economics officer at Asian Development Bank, Nepal Resident Mission. Worked as a researcher at SAWTEE, Kathmandu. Also, worked as a consultant for Ministry of Commerce & Supplies, Government of Nepal; FAO; UNDP, GIZ-CIM, and ADB among others. I was an op-ed columnist for Republica between December 2008 – June 2012. I also worked as a Junior Fellow for Trade, Equity & Development program at Carnegie Endowment for International Peace, Washington, D.C .